“Market Urbanism” refers to the synthesis of classical liberal economics and ethics (market), with an appreciation of the urban way of life and its benefits to society (urbanism). We advocate for the emergence of bottom up solutions to urban issues, as opposed to ones imposed from the top down.

When “affordable housing” is just a random middle class housing subsidy

Affordable housing and inclusionary zoning are complicated subjects and it’s hard to sum up all my thoughts and objections to the schemes in one post, so I’m going to take the death-by-a-thousand-cuts approach. Today’s installment: income eligibility levels.

Now, the stated intent of affordable housing set-asides has always been a bit unclear to me. The cynic in me thinks it’s just a way for politicians to buy votes with public money by essentially randomly redistributing from the many (market-rate renters and buyers) to the few (the lucky handful to win the lotteries for coveted subsidized units). The stated motivation, though, seems to range anywhere from a combination of helping the poor find housing to having a little bit of housing diversity, even if that “diversity” means upper-middle class alongside upper class.

In my experience, though, the programs end up overwhelmingly fulfilling the latter goal. The latest example I’ve come upon, which doesn’t seem too out of the ordinary, is from a project called Tivoli Square in the Columbia Heights neighborhood of DC, which looks like it’s associated with the big development corporation-driven DCUSA project (As an aside, DCUSA was basically a huge urban mall in what was an obviously gentrifying neighborhood. The city ended up spending a large amount of money on a parking garage that now mostly sits empty, and they’ve been having trouble renting the retail spaces set aside for local businesses. It’s also architecturally pretty ugly, and houses way more national chains than the rest of the neighborhood. Politicians hail it as a success, but in my opinion it’s the worst thing to happen to Columbia Heights since urban renewal.)

Anyway, the zipcode’s median household income in 2009 was $57,393, and the project had a 20% set-aside for some combination of low- and medium-income. The upper limit for “low income” ranges from $50,000 for a household of one to $71,450 for a household of four, and the upper limit for “medium income” ranges from $68,750 for a household of one to $98,250 for a household of four. Oh yeah, and those limits were from 2005 and are probably a few thousand dollars higher now. And on top of that, public employees, who have better-than-average job security, medical benefits, and retirement plans, often get first dibs (along with local residents) on these sorts of things.

I guess it could be worse – in New York City you can keep your rent-stabilized/controlled apartment until you make $175,000/year and the rent on your apartment reaches $2,000/month (that’s the reduced price, not the market one!). The State Assembly just passed a bill to extend the limits to $300,000/year and $3,000/month, which absolutely astounds me. The Republican-controlled Senate won’t let it go that far, but rumor is they’re willing to let it rise a bit in exchange for property tax caps in the suburbs and upstate.

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About Stephen Smith

I graduated Spring 2010 from Georgetown undergrad, with an entirely unrelated and highly regrettable major that might have made a little more sense if I actually wanted to become an international trade lawyer, but which alas seems good for little else.

The comment about public employees getting first dibs is misleading at best. 99% of HUD-funded affordable housing does not have preferences for public employees (there might still be a program for teachers and police). Some local programs might give preference for public employees but only if they qualify based on income.

As for qualifying. First of all, HUD creates those income limits using a lot of adjustments to the actual “median income” (household size adjustment is one. there are also adjustments for high construction costs and a cap based on the US median). See here: http://www.huduser.org/portal/datasets/il/il10/index.html. The 80% limit for the DC metro area is 45,100 for a 1 person household and tops out at 85,050 for a 8 person household. The numbers you found are completely wrong.

The comment about public employees getting first dibs is misleading at best. 99% of HUD-funded affordable housing does not have preferences for public employees (there might still be a program for teachers and police). Some local programs might give preference for public employees but only if they qualify based on income.

As for qualifying. First of all, HUD creates those income limits using a lot of adjustments to the actual “median income” (household size adjustment is one. there are also adjustments for high construction costs and a cap based on the US median). See here: http://www.huduser.org/portal/datasets/il/il10/index.html. The 80% limit for the DC metro area is 45,100 for a 1 person household and tops out at 85,050 for a 8 person household. The numbers you found are completely wrong.

Stephen,
I have read a lot of your criticisms of affordable housing, and for the most part I agree. However, do you propose any other solution? I disagree with most of the housing efforts to date, but yet I still do think that there is a problem that needs to be addressed. Perhaps a low-income housing tax credit that is easier to apply for and can be used for individual units rather than only entire buildings?

Why the recent jihad on affordable housing programs? It is clear that (at least in most metros) the market is unable to provide housing that is affordable to families and individuals at a range of income levels. There are a number of reasons why the market is unable to provide. Prime among them are regulatory regimes – like restrictive zoning, perverse incentives in mortgage subsidies or unbalanced infrastructure development – that stop the market from functioning properly to create adequate housing supply. Others are a result of demand side issues, primarily the stagnation of income for half of our society. The myriad of affordable housing programs are clumsy corrective measures.

The market will not magically work if we only remove the corrective measures. We need to look at the policies that stop the market from providing housing for all Americans (and only building “market rate” housing is a disingenuous cop out because it too is highly subsidized and influenced by public investments and policies). I don’t know what affordable housing policy stepped on your shoe, but can we concentrate on the root causes instead of the corrective measures? That is what we need to do to free the market to build our cities.

Regarding DCUSA – they actually reduced the parking below what was then required by code. DC OP wanted to reduce it further, but they were overruled on the basis that Target and other retailers demanded more parking in order to sign their leases. Ergo, the parking was built. If nothing else, I hope the project serves as a case study for a re-assessment of the parking requirements that tenants like Target have – because if a tenant like Target does not sign a lease, there is no project.

Regarding affordable housing – I have to echo some of the comments here. If not this, then what? I very much like the idea of massively increasing density and adding supply in the long run, but what about in the short term?

Massive upzoning. Short of that, housing vouchers (although I guess tax credits would be similar). Ideally, though, I’d like to see them applied evenly – none of this lottery business. Can you imagine if the government tried to provision other goods with a lottery? Think about it…Medicaid lottery! Disabilities lottery!

The idea of a lottery is really quite absurd when you think about it…you may have given me another post idea!

First of all, this blog takes on all policies that inflate the price of housing – as you surely know, I’ve spent plenty of time discussing restrictive zoning and perverse incentives. However, I’m not sure where you’re from, but in many cities (New York City in particular), affordable housing programs have become one of the most onerous burdens on developers. (Remember that post the other day about the developer of an ultra-luxury high rise on the Far West Side that had to give away almost 50% of the building at below cost?)

I’d also take issue with your idea of a distinction between corrective measures and root causes. As far as I’m concerned, the only “root cause” to American cities’ decline were the anti-rapid transit (in the form of forbidding elevated trains) laws of the late 1800’s, and everything else after that – from the early height limits to the modern inclusionary zoning programs – has been corrective.

Actually, there’s an incredibly irony here – the same people who are pushing for Walmart to stay out of DC (or at least to impose upon Walmart all sorts of restrictions that normal retailers aren’t subjected to) likely supported DCUSA, which is essentially a giant subsidy to the big box stores who chose to locate there.

(Also – didn’t the city actually pay for the cost of the parking garage? I thought there was more going on there than just not allowing it to be built with less parking.)

Actually, the use of lotteries for housing assistance is quite useful because it allows for rigorous research designs to assess the impact of the assistance. The treatment group (people who get a housing choice voucher) and control group (people who don’t get a voucher) are statistically the same, so any differences between the two groups that develop down the road can be attributed to the voucher. HUD did this with the Moving to Opportunity Demonstration.

Ultimately, housing is not considered an entitlement in this country, so there has to be some way to ration the funding. Other than waiting lists or lotteries, what would you suggest? Some people say that the income cap should be lowered from 80% to 50% or even 30%, and it should then be made an entitlement for those less advantaged households. I think that idea makes some sense.

It is not apparent in practice that many affordability measures are actually corrective. Affordable housing requirements and rent control likely exacerbate the very problem, on the city wide scale, that they are meant to address.

Outline of orthodox economic theory posted in the comments for a previous post.

Increasing rules, regulation, and the difficulty of the process raises the barrier to entry and pushes the market away from competitive to oligopoly and monopoly.
As a market moves towards monopoly quantity falls and prices rise and the remaining oligopolists are able to receive increasing excess profit.
Affordable housing requirements further raise the barrier to entry and thus lower total market quantity and raise market price, while extracting some of the excess profit from the remaining oligopolists.

actually it is more pernicious than this. It seems to me to be a way to buy votes using private money, as the direct costs of affordability requirements to govt. are only a small fraction of the the costs to private actors.

1. Yeah, I can see it being useful when you’re trying to gauge the impact of a program, but of course 99% of the programs will never be put to any randomized test.

2. Not sure how relevant this is, but it’s important to note that people who apply for the lottery but don’t get a spot are not exactly “normal” citizens – by definition they know their way around government subsidy programs, which most poor people don’t.

3. My suggestion would be to take whatever amount of money is available and distribute it evenly among all citizens who apply and meet the criteria. If this means a housing subsidy of $3.46 for every man, woman, and child, then so be it. It just makes no sense to me to be giving out government benefits literally at random.

You don’t have to convince me about the added costs and barriers to entry. My point is this, however. To use a budget analogy, rent control would go in the operating budget, while new construction and new supply would go in the capital budget. These two different solutions have massively different timescales.

If you want to let the market revert to equilibrium, what are you going to do until that happens?

I don’t doubt that the programs do, to some degree, exacerbate the problem. However, I don’t think Stephen’s solution of massive upzoning would solve the problem either – it certainly wouldn’t solve the issue in the near term. All that new construction is still going to focus on more affluent segments of the market. If you want to massively increase the supply at all sorts of price points, you’re going to have to subsidize some of that new construction in some way.

“If you want to let the market revert to equilibrium, what are you going to do until that happens? ”

I would go with, write a check for qualifying applicants or, second best, give them vouchers.

“I don’t doubt that the programs do, to some degree, exacerbate the problem.”

And that is a good reason to get rid of them in and of itself. If affordable housing regulations create the need for affordable housing regulations, we can then remove a significant part of the need for affordable housing regulations by removing the affordable housing regulations. If we don’t get rid of them NOW the negative feedback loop will continue, increasing the costs of the regulations and the market dislocation that would be created by removing the regulations.

“All that new construction is still going to focus on more affluent segments of the market.”

New construction that focuses on the affluent market has an almost simultaneous effect on every part of the market. As Market Urbanism explained in the previous post, market segments are not strictly segregated and independent. Building of higher end units causes people to move up from medium tier units. That will cause the price for the medium tier units to fall, allowing people who previously lived in low end units to now be able to afford the previously medium tier units. This lowers the price of the low tier units allowing those who live in slum conditions to move into the low tier units or increase their square footage of their low tier units.

The effect on the lower tier units won’t be perfectly simultaneous because of transaction costs and the fact that there exists a world wide demand for housing in New York.

I very much like your discussions on restrictive zoning and perverse incentives, but I respectfully think you are missing a lot in your understanding of how exactly many affordable housing programs work and how they interact with the development process. Also, I am puzzled by your urban history statement about forbidding elevated trains being the root cause of urban decline.

For the record, I’m from Massachusetts. Our situation is different from NYC. Affordable housing programs are needed by developers to build anything at all in many of our municipalities, either because they provide zoning relief from restrictive local governments or because the subsidies compensate for high land and construction costs.

Yeah, the zoning bonuses really make the topic a lot more complicated, and hopefully I’ll get to that soon in a post. But my point about the els is that everything has been in reaction to something else, and it keeps making the problem worse. The original widespread traditional zoning came into place in America’s largest cities (NYC was the pioneer here), in my opinion, because of the urban congestion that was caused by the limits on transit expansion. (In general, people didn’t want elevated trains anywhere, even though they’re the most economical, and instead forced private companies to build underground, and to never raise the fare about 5 cents, at that. Obviously this created an undersupply of mass transit.) That is to say, the zoning rules were, in some ways, necessary to curb the appetite for urban living that the voting public wasn’t willing to provide.

Anyway, I guess my overall point is that all of these are added as corrective measures, but they generate problems themselves (in the case of inclusionary zoning, the problem of an implicit-but-difficult-to-assess double-digit percentage tax added to all new construction), and at some point people just view them as a given, and nothing ever gets changed. To say that affordable housing mandates are a temporary fix just doesn’t pass the laugh test – all they do, in my opinion, is legitimize the status quo of massive overregulation of land use, and urban land in particular.

In fact, it’s gotten to the point where affordable housing advocates themselves don’t want things to be as-of-right upzoned, because then they’re out of jobs! That’s my problem with it.

For the record, I’m from Massachusetts. Our situation is
different from NYC. Affordable housing programs are needed by developers to
build anything at all in many of our municipalities, either because they
provide zoning relief from restrictive local governments or because the
subsidies compensate for high land and construction costs.

I’m familiar with development in both NYC and Boston. No, developers do not
“need” these subsidies. Yes, the FAR bonuses in Boston/Cambridge allow
developers to build denser than otherwise, but research at MIT has shown
that in most cases provide no economic relief, and thus only political
incentive. Furthermore, markets in construction and especially land will
adjust according to the policy. As land use is liberalized, land prices
would go up, but mitigated by the ability to spread that cost over more
units. Furthermore, land is much more expensive in NYC than Boston and
still gets built upon. I’d rather have the option to go for the bonus than
not, but as most here agree, the problem is with density restrictions in the
first place…

It is a DC program, but it’s funded by HUD and it uses income limits defined by HUD. If the point of the post is to suggest that DC is subsidizing middle class households (and that that is bad policy) then Stephen should be consulting DC’s Department of Housing and Community Development to determine what rules they have established. The Columbia Heights Development Corp is not an authoritative source for generalizing about affordable housing policy in DC. It’s just one developer, responsible for one neighborhood, that may very well be out of compliace with the rules established by DC and HUD. Now, that’s something worth investigating. It just doesn’t support Stephen’s policy conclusion.

Stephen – teachers and police are a very small subset of public employees(<5%, I would estimate), and programs that target them are a very small subset of affordable housing programs (<1% of the country's affordable housing $). That does not support your generic conclusion that "public employees … often get first dibs (along with local residents) on these sorts of things."

Hard to keep up with all the great posts on the Market Urbanism blog (both by Stephen and various commenters) in the last few days. Since I don’t have the time right now to participate in a more extended discussion, in this comment I’d like to try and “step back” a bit and briefly (I hope!) outline what I see as the major arguments behind various inclusionary zoning and “affordable” housing policies. I think this might help, at least, to clarify the discussion a bit.

Stephen wrote:

“Now, the stated intent of affordable housing set-asides has always been a bit unclear to me.”

Benjamin writes:

I think the stated intent of affordable housing set-asides is unclear to a lot of people because there are, in fact, at least three different stated intents, and people (in general) aren’t being as specific as they should be in the discussion. “Everyone” is assuming that we’re all talking about the same thing when we aren’t.

While it’s legitimate to mix and match the three major reasons, I think it’s important to first separate them out from one another before discussing them as a dynamic trio.

Here are the three major schools of thought behing affordable housing:

1) Government-assisted (or, in earlier days of the movement, government-built) housing is supposedly necessary to provide safe, sanitary and decent housing for (originally) the poor and (these days) even the middle-class. (I think of this as the housing reformer rationale.)

2) In order for city neighborhoods to be truly healthy over the long haul, it is supposedly important that city districts be reasonably socio-economically diverse and some sort of government intervention is needed to accomplish this. (This argument seems to me to stem from the work of Jane Jacobs.)

3) It’s important to our society, as a matter of social justice (and also, practically speaking, for long-term economic health) that geographical entities (incuding areas that aren’t cities) provide housing for the poor and middle-class people (particularly minorities) that they’ve excuded via overly restrictive zoning regulations — which may have, indeed, been promulgated in the first place to keep out the poor among “undesirable” ethnic groups. (I think of this as the “Mt. Laurel” reason.)

If I do have the time to post some follow-up comments, I hope people won’t mind if I post my follow-up comments (other than a quick “P.S.”) as independent posts, rather than as part of any nested thread.

As someone with a long history in newspapers I would encourage you to double-check your sources before you take numbers off a website. In this case in particular it might have proven revelatory and, as Pjoice suggests, might have given you something else to write about.